DBRS Morningstar Confirms Ratings on All Classes of BANK 2018-BNK13

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-BNK13 issued by BANK 2018-BNK13 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating confirmations reflect DBRS Morningstar’s stable outlook and loss expectations for the transaction, which remain relatively unchanged from the last rating action in November 2022. As of the July 2023 remittance report, 60 of the original 62 loans remain in the pool, representing a collateral reduction of 12.0% since issuance. One loan, representing 0.4% of the pool, is fully defeased. In addition, four loans, representing 5.9% of the pool, are on the servicer’s watchlist and two loans, representing 5.5% of the pool, are in special servicing. The pool is concentrated by property type, where loans secured by retail and office properties each represent more than 35.0% of the current pool balance. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets. However, of the nine office loans (39.7% of the pool), only two exhibited performances that suggested increased credit risk since issuance and both were stressed in the analysis for this review, resulting in a weighted-average (WA) expected loss that was nearly triple the pool average. In spite of the large office concentration, the majority of the loans in the pool exhibit healthy credit metrics, with the 10 largest loans (60.7% of the pool) reporting a WA debt service coverage ratio (DSCR) of 1.24 times (x) based on the most recent year-end financials.

The largest specially serviced loan, Fair Oaks Mall – Trust (Prospectus ID#12; 3.8% of the pool), is secured by a portion of approximately 780,000 square feet (sf) of a 1.5 million-sf regional mall in Fairfax, Virginia, and is sponsored by Taubman Realty Group Limited Partnership and Morton Olshan. The loan is pari passu with the BBCMS Mortgage Trust 2018-C2 transaction, which is also rated by DBRS Morningstar. At issuance, the mall was anchored by a collateral Macy's (27.6% of the net rentable area (NRA), lease expiration in February 2026) and the non-collateral anchors, Macy's Furniture Gallery, Sears, JC Penney, and Lord & Taylor. While the space previously occupied by Sears has been backfilled by Dick’s Sporting Goods and Golf Galaxy, the Lord & Taylor box has remained vacant since the tenant filed for bankruptcy in 2020. The loan transferred to special servicing in February 2023 for imminent monetary default as the loan was not expected to repay at its May 2023 maturity. The borrower has requested an extension and the terms are currently being finalized. As part of the request, the borrower noted excess funds would be available for tenant improvements and capital expenditures, although the borrower has indicated its current limitations in contributing additional capital to the subject property.

According to the March 2023 rent roll, the property was 88.7% occupied, in comparison with being 89.3% occupied at YE2021 and 91.6% occupied at issuance. Additionally, tenants occupying more than 40.0% of the NRA have leases that have expired or are scheduled to expire in the next 12 months. However, tenants occupying approximately 17.4% of the NRA that had lease expirations between January and August 2023 remain in the property’s online directory, including the second-largest tenant, Forever 21 (6.7% of the NRA). While occupancy has remained relatively stable over the past few years, the property’s net cash flow (NCF) has declined year over year. According to the most recent financials, the annualized NCF for the trailing nine months ended September 30, 2022, was $19.6 million (reflecting a DSCR of 1.13x), slightly below the YE2021 NCF of $20.1 million (reflecting a DSCR of 1.16x) and still less than the DBRS Morningstar NCF $22.7 million (DSCR of 1.62x). There is also concern about competition, which includes Tysons Corner Center and Tysons Galleria malls, both of which offer luxury brands that cater to the higher-income demographics. According to the June 2023 sales report, the total mall sales for the YE2022 period was approximately $432 per square foot (psf), inclusive of Apple sales, in comparison with the competitive set’s figure of $469 psf. Without Apple, annual sales was approximately $325 psf. At issuance, the loan was shadow rated investment grade primarily because of the low A-note loan-to-value ratio (LTV) of 32.1% and high DBRS Morningstar Term DSCR. Considering that the loan was unable to repay at maturity, performance is below DBRS Morningstar expectations, significant competition in the area, and the borrower’s limitations in contributing additional capital to the subject, DBRS Morningstar removed the loan’s investment-grade shadow rating and increased the probability of default. This resulted in a loan-level expected loss that was more than double the pool’s average.

The Regal Cinemas Lincolnshire loan (Prospectus ID#17; 1.8% of the pool) is secured by a 75,372-sf movie theatre complex in Lincolnshire, Illinois. The property was previously occupied by single tenant, Regal Cinemas, that vacated the property in February 2023 after filing for bankruptcy, which ultimately led to the loan’s transfer to special servicing in May 2023 for imminent monetary default. The last loan payment received was in March 2023 and, according to the servicer, discussions with various brokers to evaluate the property are ongoing, with foreclosure stated as the likely workout strategy. For this review, DBRS Morningstar analyzed this loan with a liquidation scenario, resulting in a loss severity in excess of 25%.

The largest loan on the servicer’s watchlist, Ditson Building (Prospectus ID#11; 4.5% of the pool), is secured by a Class B office property in Midtown New York, a block from the Empire State Building. The loan has been monitored on the servicer’s watchlist since January 2021 for low DSCRs driven by the precipitous decline in occupancy after several tenants vacated the property at their lease expirations, including the former largest tenant, TTC USA Consulting (47.2% of the NRA), which vacated in June 2022. As a result of the departures, the occupancy rate dropped to 43.4% per the February 2023 rent roll and the borrower is working to backfill the vacant space. The current largest tenant is Research Foundation of CUNY (18.9% of NRA), which has a lease scheduled to expire in September 2026. Based on the financials for the trailing six months ended June 30, 2022, the DSCR remains below breakeven at 0.30x, compared with the YE2021 DSCR of 0.73x and DBRS Morningstar DSCR of 1.16x. Given the performance challenges, DBRS Morningstar increased the probability of default and applied an elevated stress to the loan’s LTV in its analysis, resulting in an expected loss that was more than triple the pool average.

Along with the Fair Oaks Mall loan, DBRS Morningstar also shadow-rated three other loans at issuance as investment grade—1745 Broadway (Prospectus ID#1; 11.3% of the pool), Pfizer Building (Prospectus ID#3; 1.7% of the pool), and 181 Fremont Street (Prospectus ID#14; 2.6% of the pool). This assessment was supported by the loans’ strong credit metrics, strong sponsorship strength, and the historically stable performance. With this review, DBRS Morningstar confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Classes X-A, X-B, X-D, X-E, and X-F are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].